Euro falls most in 14 months as Cyprus turmoil adds debt concern

The euro slid the most in 14 months against the dollar after a proposed levy on bank deposits in Cyprus threatened to worsen the European debt crisis.

The 17-nation currency fell to a two-week low versus the yen as the nation postponed a vote on meeting demands by regional finance ministers to raise 5.8 billion euros ($7.5 billion) by imposing losses on its depositors. The euro pared its drop as declines in Italian and Spanish government bonds were limited.

“In the case of Cyprus, there is concern about the unknown and potential contagion risks to other indebted countries in the euro area,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said by telephone from Washington, D.C. “Investor response has been to sell the euro first and ask questions later.”

The euro slid 1.1% to $1.2933 at 3:33 p.m. in New York, after dropping as much as 1.5%, the biggest decline since Jan. 13, 2012. The common currency slumped 1.2% to 123.14 yen after falling to 121.15, the weakest level since March 5. Japan’s currency gained 0.1% to 95.22 per dollar.

Trading Fluctuations

One-week implied volatility on the euro-dollar exchange rate rose as much as 34%, the biggest single-day increase since May 2010. The gauge climbed to 11.23% before trading at 10.22%.

The premium for one-month options granting the right to sell the euro against the dollar relative to those allowing for purchases increased to 1.18 percentage points from 0.96 on March 15, the 25-delta risk reversal shows.

The shared currency bounced off a critical support zone from $1.2865 to $1.2890, which includes the 200-day moving average, Cilline Bain, a London-based technical analyst at Credit Suisse Group AG, wrote today in a note to clients. The euro may increase to $1.3319, which would be its strongest level since Feb. 25, he said.

Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm that settled over the currency bloc since the European Central Bank’s pledge in September to backstop troubled nations’ debt. The terms of Cyprus’s bailout are negative for depositors across Europe, and may hurt bank ratings region-wide, Moody’s Investors Service said in a Credit Outlook report today.